What does Canada’s economy look like with oil prices at $40 a barrel? Certainly it won’t be the energy superpower envisioned by Prime Minister Stephen Harper.

If $40 a barrel still seems a ways off, consider that the benchmark price for oil sands crude is already trading in that price range. What’s more, if production from high cost sources isn’t withdrawn from an oversupplied market, oil prices may soon be trading even lower.

The first thing Canadians should recognize about the new world order for oil prices is that—contrary to what we’re being told by our federal government—the economy is no longer in dire need of any new pipelines. For that matter, it can live without the new rail terminals being built to move oil as well. Yesterday’s transportation bottlenecks aren’t relevant in today’s marketplace.

At current prices there won’t be any massive expansion of oil sands production because those projects, which would produce some of the world’s most expensive crude, no longer make economic sense.

The recent spate of project cancellations by global oil giants—Total’s Joslyn mine, Shell’s at Pierre River, and Statoil’s Corner oil sands venture—are only the beginning. As oil prices grind lower, we can expect to hear about tens of billions of dollars of proposed spending that will be cancelled or indefinitely postponed.

Not long ago, the grand vision for the oil sands saw production doubling over the next 20 years. Now that dream is in the rear view mirror. Rather than expanding production, the industry’s new economic imperative will be attempting to cut costs in a bid to maintain current output.

With the exception of oil sands players themselves, no one will feel those project cancellations more acutely than new Alberta Premier Jim Prentice. His province’s budget is beholden to the gusher of bitumen royalties that will no longer be accruing as planned. He could choose to stay the course on spending, as former Premier Don Getty did when oil prices plunged in the 1980s, in hopes that a price recovery will materialize. That option, as Getty discovered, would soon see Alberta’s budget surplus morph into spiraling deficits. The province’s balance sheet wasn’t cleaned up until the axe-wielding Ralph Klein took over. In his first term, Klein slashed spending on social services by 30 percent, cut the education budget by 16 percent and lowered health care expenditures by nearly 20 percent.

Of course, falling oil prices are a concern for much more than just Alberta’s budget position. Real estate values also face more risk, particularly downtown Calgary office space. For oil sands operators, staying alive in a low price environment won’t just mean cancelling expansion plans and cutting jobs in the field. Head office positions are also destined for the chopping block, which is bad news for the shiny new towers going up in Calgary’s commercial core.

If plunging oil prices are writing a boom to bust story in provinces such as Alberta, Saskatchewan, and Newfoundland, the narrative will be much different in other parts of the country.

Ontario’s long-depressed economy is already beginning to find a second wind, recently leading the country in economic growth. And the engine is just beginning to rev up. As the largest oil-consuming province in the country, lower oil prices put more money back into the pockets of Ontarians, while also juicing the buying power of its most important trading partner. Ontario’s trade leverage with the U.S. is set to become even more meaningful as the Canadian dollar continues to slide along with the country’s rapidly fading oil prospects.

Just as the oil sands boom turned Canada’s currency into a petrodollar, pushing it above parity with the greenback, the loonie is already tumbling in the wake of lower oil prices. And it shouldn’t expect any help from the Bank of Canada, which continues to signal that it’s willing to live with a much lower exchange rate in the face of a strengthening U.S. dollar.

A loonie at 75 cents means GM and Ford may once again consider Ontario an attractive place to make cars and trucks. Even if they don’t, you can bet others will. With the loonie’s value falling to three quarters of where it was only a few years ago, we’ll start seeing Ontario, as well as other regions of the country start to regain some of the hundreds of thousands of manufacturing jobs that were lost in the last decade amidst a severely overvalued currency.

For the Canadian economy as a whole much is about to change, while much will also remain the same. Once again, oil will largely define the fault lines that separate the haves from the have-nots (or at least the growing from the stagnating). But at $40 oil, it’s the consuming provinces that will drive economic growth. Rather than oil flowing east through new pipelines, jobs and investment will be heading in that direction instead.

  • Doug

    What we learn from the last 10-20 years about the price of oil is everything goes full circle. In the last decade, a growing world economy as well as depleting sources of conventional oil drove the price quite high. That helped put the world economy into recession, and consequently the price of oil dropped. It went up again, and as a result a lot of new production (fracking, farther offshore oil rigs) went online, flooded the market, and the price dropped again recently. Now the low oil price will do two things. The first is it will help the world economy, at least for net oil importers. The second thing is it will cut production, as new projects are being cancelled or postponed. It’s inevitable that falling production and increasing demand will, sooner or later, put upward pressure on the price of oil again. It looks like a good buying opportunity for oil stocks or ETFs right now.

  • http://olduvai.ca Steve

    I think this might be the ‘calm before the storm’. Should marginal production be taken off line and economic activities that depend on oil begin to see an increase, then at some point in the not too distant future we will see oil demand outpace supply and the prices shoot back up. If the marginal production that has helped to contribute to the oversupply cannot be resurrected quickly, we might see prices jump higher than the $100/barrel we recently experienced, as the boom/bust cycle begins anew. But, as with any economic prediction, only time will tell.

  • scissorpaws

    Tragic for the global environment. Price of gasoline had barely begun to drop before SUV sales in the US shot up. I can’t imagine anyone investing in an electric car – not that many were anyway. With jet fuel cheap, no point in airlines investing in new, energy-efficient jets. Shipping products from China courtesy of dirt cheap bunker fuel, just got a lot more cost effective which means more. With a Republican congress in the US the odds of a carbon tax to level the playing field with renewables are not good. That America might sign any sort of Greenhouse Gas Restriction agreement beyond the pro-forma agreement with China are nil. Further investment in battery/wind/solar technology will stall. So kick that can another decade or two down the road. 2014 was the hottest year on record. Anyone taking bets on 2015? But at least we’ll go there in style.

  • bill

    Think you have it wrong in a lot of ways. The big oilsands projects are still full speed ahead. Check exxon kearl lake, suncor fort hills, all of the cenovus many stages, etc. A seven year cycle and 7-12 billion dollar investment does not look at six months or even one year cycles in prices/currency exchange. The shorter term projects will see slowdowns and marginal companies with poor finances – southern pacific, laracina, athabasca, connacher, sunshine are in trouble at these prices but they don’t add up to even one of the major projects in capital or production. There is still millions of barrels a day due to come on stream in the next few years that will need access to markets and pipeline. The fast declines of the shale projects will be the turndown capacity for north America and the oilsands will become the baselines steady Stat long term projects. ..

  • thequitsmokingguy

    I am not too surprised by this low oil price because of the impact that fracking has had on the supply. Once I heard that the US was a net exporter of oil then I felt that the price would have to come down as there was now this whole new place to get oil. But with the supply increasing as more fracking comes on line we have to wait until the cheap Saudi oil depletes itself or the Saudis decide they need to get more money from their oil in order to support their revenue-hungry societies and keep the poor people over there from rising up and trying to get in on the deal
    No… I think we have low prices for a while and until fracking gets proved to be either environment neutral or much worse than pipelines, the supply picture isn’t going to change… much. The only thing that bodes well for this is that fracking isn’t cheap so the USA and Canada cannot participate in a cheap oil world so we must wait and see Master Yoda…. in good time – be revealed it all will be.

  • jim patterson

    they survived well on low prices before and they will do it again. Be ready for 10 years of low oil prices and then all the peak oil theorists will come out again

  • Frankly

    Why is peak oil refuted? It’s a nonrenewable resource. It will run out? It’s only a question of when.

  • jim patterson

    not in our lifetime it won’t. Lots of oil

  • instincts

    Haha – You think those ‘big boys’ will roll the dice in the current face where they hardly stand to even break even? …You must have lots of oilsands stocks — there’s always hope, aint there?

  • http://fractalicious.ca/ Adam Grant

    Let’s not count the electric car out yet. They’re fun to drive, and once economies of scale kick in, should be cheaper to build as well as cheaper to maintain, cheaper to run and longer-lasting than a corresponding gasoline car.
    Solar and wind energy aren’t in competition with coal, they compete with coal, nuclear and natural gas. Actually, by slowing down shale activity in the US, cheaper oil should reduce natural gas production, thus raising the price of natural gas.

  • scissorpaws

    The battery is the only drawback. It’s horribly expensive and not terribly efficient. The electric bikes all disappear when the cold weather arrives. I don’t know what happened to the company that was going to replace batteries at refueling stations and the owner just pays for the charge. That might work, but I haven’t heard about it in at least three years. I think until we get a super battery electric cars won’t happen. You’re right though, the rest of the car is maintenance free.